Executive Summary: Workers With Chronic Conditions: The Tension Between Risk Selection and Adequate Coverage
LFP-06.05 — The Populations#
A level funded plan cannot exclude individuals based on health status. A stop loss carrier can. The gap between these two rules creates a financial exposure that no current product architecture resolves, and the employer who discovers it mid-plan-year is the one who absorbs the consequences.
The plan-level prohibition is absolute. HIPAA, codified at 29 C.F.R. § 2590.702, prohibits group health plans from denying eligibility, charging higher premiums, or excluding coverage based on health status factors including medical history, genetic information, and evidence of insurability. The ACA’s Section 1201, amending Section 2705 of the Public Health Service Act, eliminated even the limited pre-existing condition exclusion periods HIPAA had previously permitted. Noncompliance triggers excise taxes of $100 per day per affected individual under 26 U.S.C. § 4980D, alongside ERISA civil penalties and participant litigation.
Stop loss is a contract between the carrier and the employer, not a group health plan. HIPAA’s and the ACA’s nondiscrimination requirements do not govern stop loss underwriting. The NAIC Stop Loss Insurance Model Act, adopted in 1995 and revised in 1999, provides no prohibition on individual health-status underwriting. Carriers review health questionnaires and prior claims data and may assign a laser — either excluding a specific member from specific stop loss protection entirely, or setting a member-specific attachment point far above the group standard. Milliman’s 2024 Employer Stop Loss Market Survey, covering 32 market participants, documents this practice across the industry. Common triggers include hemophilia, solid organ and bone marrow transplants, NICU exposure, cancer diagnoses, and gene and cell therapies.
The structural consequence is specific: a 15-person employer with one member generating annual hemophilia claims approaching $250,000, against total group expected claims of roughly $350,000, establishes a level funded plan. The stop loss carrier excludes the hemophilia patient from specific coverage. The claims fund is depleted by the third quarter. The aggregate attachment point — set at 120% to 125% of expected claims — is not triggered because claims concentrated in one member rather than distributing across the group. The employer owes the uncapped amount between the depleted fund and the aggregate threshold. The Peterson-KFF Health System Tracker analysis of 2023 MEPS data found that 5% of the population accounts for nearly half of all health spending nationally, with the top 1% averaging $150,467 in annual expenditures. In a 15-person group, a single high-cost member may represent 30% to 50% of total expected claims.
Resolving the tension requires either extending nondiscrimination requirements to stop loss underwriting through federal legislation — which no proposal with current momentum addresses — or pooling lasered members across multiple employers through captive structures or MEWAs, both of which face adoption barriers that small employers cannot individually overcome. Employers with members whose conditions generate expected claims approaching a significant share of the group’s total fund need to understand before enrollment that the stop loss protection the product is built around does not apply to their highest-cost member.